HC Deb 22 December 1997 vol 303 cc513-5W
Mr. Derek Twigg

To ask the President of the Board of Trade what progress has been made on the plans to merge Magnox Electric with British Nuclear Fuels; and if she will make a statement. [22363]

Mr. Battle

I am pleased to report that, subject to Parliamentary clearance of certain proposed financial arrangements, we expect to effect the first stage of the merger—namely the transfer of the Government's shareholding in Magnox Electric to BNFL—early in the New Year. Full integration of the combined businesses of the two companies is expected to be completed about 12 months after the share transfer, subject to the companies meeting the requirements of the relevant regulators.

Safety will continue to be the companies' overriding concern. The merger will not change that.

Before full integration can take place, BNFL will need to have obtained new nuclear site licences, new radioactive discharge authorisations and a revised electricity generation licence to replace those currently held by Magnox Electric. The independent nuclear safety, environmental and electricity regulating authorities have been consulted about the proposed integration arrangements and have indicated that they are prepared to consider applications on the basis of those arrangements.

The merger will create an enlarged, integrated and strong BNFL able, for the first time, to manage all aspects of the magnox business as a whole.

Under existing arrangements, a substantial part of Magnox Electric's costs relate to fuel, reprocessing and waste management services provided by BNFL. A principal aim of the merger is to bring together the financial and management responsibilities for these processes to create better incentives for securing cost reductions.

Bringing together magnox generation and the supporting fuel cycle services under one management will also mean the business can be managed as a whole and with greater efficiency. The merger should therefore accelerate the cost reduction and business improvement programmes which each of the companies has been separately pursuing. It will remove the barriers which exist between Magnox as customer and BNFL as supplier bringing greater transparency to the underlying economics of the business and providing opportunities to combine the technical and commercial skills which currently exist within the two companies.

I have taken steps, and know that many people are concerned, to ensure that the full costs of the companies' nuclear liabilities will be met. I am pleased to announce that the combined group will establish an internal dedicated Liabilities Fund consisting of cash and realisable assets which will ensure that the full costs of all future liabilities of Magnox and BNFL can be met as they fall due. I am sure that this development coupled with the greater transparency that this will entail will be widely welcomed.

In examining how to effect the merger, a great deal of attention was paid to the financial arrangements. When the nuclear generating industry was re-organised at the end of March 1996, Magnox Electric received an undertaking in exchange for, and equivalent in value to, the net book value of assets transferred out of the company and the liabilities it took on from Scottish Nuclear. The undertaking provides for the Government to make payments to enable Magnox to meet its future financial obligations. The principal value of that undertaking at March 1996 was £3.7 billion. That value is increased annually by 4.5 per cent in real terms and is projected to have a value of £4.3 billion in March 1998. We have carried out with Magnox Electric and BNFL a thorough review of the arrangements to apply to the combined organisation. In particular, we needed to get an up to date assessment of the forecast cost of discharging liabilities and then determine what level of Government undertaking would be appropriate to the combined organisation. The conclusion is that the principal sum of a new undertaking (to replace the existing undertaking to Magnox Electric) should be set at £3.7 billion as at 31 March 1998, but that it would be appropriate to apply the same escalation terms as in the existing undertaking to Magnox Electric. This represents an immediate reduction of some £600 million in the Government's current liability.

The new arrangements will also bring to an end assurances given by the Government in 1990 and reaffirmed each year since then which give Magnox Electric added comfort that the Government will, if necessary, help them to meet the costs of their long term nuclear liabilities. Magnox Electric has successfully reduced the large deficit for nuclear liabilities in its balance sheet and projects that without the benefits of integration the gap would have reduced to £0.5 billion by the end of the current financial year. Taking into account the benefits which are expected to flow from the merger with BNFL, all three parties have agreed that there is no need for the Government assurances to continue beyond share transfer.

Given the length of time which these arrangements are to cover, there is provision for the value of the proposed new undertaking to be subject to limited review every five years or earlier if Government and BNFL agree.

We expect the combined group to reduce substantially the costs of discharging magnox liabilities through efficiency savings. In recognition of this, a formal mechanism will be put in place under which Government and the combined business will share the benefit of the first £1.6 billion (at 31 March 1998 prices) of reductions in the company's magnox-related nuclear provisions. This will allow the undertaking to be adjusted downwards by up to £0.8 billion (at the same base price). The majority of these benefits are expected to accrue within the first ten years after the merger.

In summary, the merger will result in a robust and viable group, better placed and better incentivised to manage the magnox business as a whole and to secure savings for the taxpayer. At the same time it will bring the establishment of a dedicated, internal fund to meet the companies' nuclear liabilities; there will be an immediate reduction of some £1.1 billion in the Government's current liability, and incentives will be introduced for the combined business to make further substantial savings which the Government will share. The merger has the full support of the Boards of both Magnox and BNFL.

My Department is today laying before this House a Departmental Minute about the new financial undertaking which is proposed to be given to the integrated group. A copy of that Minute together with a Briefing Note, which provides more detailed information on the proposed integration of the two companies, is being placed in the libraries of both Houses.